Market Summary
The U.S. economy is much stronger than some of the media’s pessimistic reports. January was affected by weather and the after-effects of the government shutdown. Since that time, U.S. economic growth has improved; we remain optimistic that the U.S. economy will grow by at least 2.4% in 2019. The world’s economies in general are doing better than some pessimistic headlines announce. Europe, Japan, China, and other central banks are joining the U.S. with their own programs to stimulate economic activity in their countries. In Europe, the concept of stock-buying by the European Central Bank is widely believed to be moving ahead. In Japan, the central bank has bought ETFs and will continue to do so. Hong Kong has done this kind of thing in the past, and so has Switzerland. All of this will put upward pressure on stock prices as the year progresses. The media make money by selling enthusiasm and fear; they have recently been emphasizing fear. But looking deeper into the economic picture, we’re optimistic.
The U.S.
The U.S. market is consolidating after a strong recovery from the late-2018 growth scare and swoon, after which we believe it can move higher. Despite media commentary on the inversion of one particular yield curve (one to which we don’t ascribe great significance), we observe that (1) yield curve inversion typically occurs months or years before a bull-market peak, (2) both overall and granular financial conditions in the U.S. remain positive, and (3) we believe that economic data will accelerate in the second half of the year, and that U.S. stocks, while now consolidating, will continue to price in that turn. Progress on trade negotiations will also be supportive.
Within the U.S., we like the tech leaders — while we note that investors should be alert for pressures and attacks coming on leaders such as Facebook [NASDAQ: FB] and Alphabet [NASDAQ: GOOG]. Innovation continues strong in U.S. tech, witness Microsoft’s [NASDAQ: MSFT] recent announcement of a milestone in its DNA data storage collaboration with the University of Washington, which we’ll discuss next week.
Rapidly falling interest rates may be helpful to homebuilders and improve investor sentiment towards dividend payers. They also change the analytical calculus around indebted companies, giving them a little more flexibility.
China and Emerging Markets
As mentioned above, we remain tactically bullish on China for reasons discussed in our last several letters. Emerging markets are OK, though a second choice for us, and exposed to more economic and geopolitical vicissitudes from China, the U.S., and Europe; we favor manufacturing exporters over commodity-driven economies.
Gold and Copper
We continue to believe gold can see modest appreciation in 2019, dependent as always on a cooperative dollar. Investors who have profits in copper might consider taking them, since near-term supply constraints have been somewhat alleviated.
Thanks for listening; we welcome your calls and questions.
